SOMETIMES THEY DO RING A BELL AT THE TOP…” With valuations at record highs, margin debt at epic levels, and professional investors extremely bullish, even the hint of fear will begin the collapse.”

Tuesday, July 28, 2015
By Paul Martin

James Quinn
TheBurningPlatform.com
28th July 2015

I’m starting to get the feeling the scorn and ridicule heaped upon Dr. Hussman by the Wall Street shysters is about to be thrown back in their faces. Of course, he isn’t an I told you so type of person. He’s an analytical investor who bases his thinking upon historical facts and valuation methods that have proven accurate over the last 100 years of investing. His two key principles on investing are flashing red. Corporate revenues and profits are falling. The attitude of investors regarding risk is shifting from greed to fear. With valuations at record highs, margin debt at epic levels, and professional investors extremely bullish, even the hint of fear will begin the collapse. It’s already happened twice in the last fifteen years and Hussman called the previous two collapses too.

If I were to choose anything that investors should memorize – that will serve them well over a lifetime of investing – it would be the following two principles:

1) Valuations control long-term returns. The higher the price you pay today for each dollar you expect to receive in the future, the lower the long-term return you should expect from your investment. Don’t take current earnings at face value, because profit margins are not permanent. Historically, the most reliable indicators of market valuation are driven by revenues, not earnings.

2) Risk-seeking and risk-aversion control returns over shorter portions of the market cycle. The difference between an overvalued market that becomes more overvalued, and an overvalued market that crashes, has little to do with the level of valuation and everything to do with the attitude of investors toward risk. When investors are risk-seeking, they are rarely selective about it. Historically, the most reliable way to measure risk attitudes is by the uniformity or divergence of price movements across a wide range of securities.

I should make the point that these principles aren’t new. They capture the same principles I laid out in October 2000, at the beginning of a market collapse that would take the S&P 500 down by half and the Nasdaq 100 down by 83%. They capture the same principles that prompted me to turn constructive in April 2003 after that collapse. They capture the same principles I laid out in July 2007, just before the global financial crisis took the S&P 500 down by 55%.

For those who are visually astute, please peruse the chart below. The conclusion is quite simple. When the current conditions have existed over the last 45 years, the stock market crashes. Period.

The Rest…HERE

Leave a Reply

Join the revolution in 2018. Revolution Radio is 100% volunteer ran. Any contributions are greatly appreciated. God bless!

Follow us on Twitter